Kevin Colleran: Chasing Momentum Without a Viable Business Model

KEVIN COLLERAN: Most entrepreneurs will not succeed in building the next global business success story. In fact, they are even unlikely to build a business that can be self-sustaining. Yet the allure of entrepreneurship and the chance to build a product or company that changes the world is overwhelmingly motivating and justifies the risk for many. Rather than looking back on the mistakes that entrepreneurs have made in the past, let’s look forward at the potential pitfalls that entrepreneurs just starting out should avoid:

Don’t chase momentum if there is no viable business model. All too often entrepreneurs get enamored with the early growth and traction of their product and forget all about sustainable business models. There are few examples of this strategy working successfully, but the graveyards full of companies that have suffered tragic deaths by this same model are vast. Ideas that seemed “smart” in the early 2000s and even in the past several years seem pretty ridiculous now. The truth is that rapid traction, growth and momentum do not always equal business success.

Everett Collection

A scene from the TV show “South Park”

I am always reminded of the great “South Park” episode “Underpants Gnomes,” which poked fun at a three-step business model that started with “collect underpants” and ended with “profit” — without ever identifying the step in between. Rapid accelerated growth and traction can only benefit a company only if there is a business model to support the similarly accelerating costs and business complexities. My advice is always to first figure out the end-game business model at the beginning so that if the product or service is lucky enough to become a rocket ship, the company will not be crushed by the success.

Don’t build a company for today; build one for tomorrow. When trying to come up with a business idea it is all-too-easy to get caught up focusing on the right market need or solution for today, and thus, building a product or service that will quickly become stale or obsolete. Even in the fast-paced tech world it takes time to build a company, so if a business is solving a real opportunity with today’s perfect product, it will likely be dead on arrival when it is finally able to launch. It is very natural to brainstorm within the current technical and market constraints, but a successful entrepreneur needs to be smart (or crazy) enough to see the business opportunities of tomorrow.

Fundraising is about more than raising funds. Some days it seems like everybody in the world is an angel investor. I doubt there has ever been a time when a startup entrepreneur had more options of people to approach for funding. This vast pool of potential checkbooks is a great thing for entrepreneurship, but there is a downside to this. The reality is that most angel investors can offer the entrepreneurs they back little to no additional value or support. For a startup entrepreneur, the intangible wealth, like brainpower, industry expertise, personal connections, etc., that a strategic investor can offer are much more critical to the success of the company than the actual dollars being invested. Rather than try to optimize the fundraising process for celebrity status and branding, an entrepreneur should always focus more on the intangible benefits and share of mind, commitment and effort that come along with the check.

You are not alone. One of the best improvements to help ease the overwhelming experience of becoming an entrepreneur is the creation of numerous incubators, accelerators, hatcheries and mentor programs that have recently been developed for early stage businesses. The adventure of starting a business can be daunting and lonely for many people (especially first-time entrepreneurs) so being part of an organization that surrounds you with other people going through the same roller-coaster ride can be very rewarding and beneficial. I feel that the minimum equity that is given up by a founder to join one of these programs is well worth the dilution and may in fact result in the best return on investment for the entrepreneur and the company being created.

Are you platform reliant? Most companies that are being built today, no matter what industry, are reliant exclusively on a platform that is outside of their control. In the tech world this could mean building for a specific browser, operating system, mobile standards, social media network or other platform. It is important to realize how quickly the rules, standards, usage or trends can change within any of these platforms. There is nothing more frustrating than flawlessly executing on building the “perfect business” only to find out that the rules of the game have changed and that gaming app you spent six months on is now worthless. If an entrepreneur is building a platform-reliant business, he or she must make sure that the business has the flexibility to quickly pivot or even jump ship completely if necessary.

It may actually be cool to stay in school. We have all seen the public-service announcements on TV where celebrities and professional athletes encourage kids to stay in school. This may actually be good advice. It seems like there is a growing fictional connection between dropping out of school and becoming a successful entrepreneur. I worry that this trend is usually an incredibly misguided aspiration and will proves to be disadvantageous to both the entrepreneur and the company he or she creates. Many schools these days, no matter what level of education, are offering incredible resources to people who want to be students and entrepreneurs in parallel. For a very small group of entrepreneurs, a time may come in which both school and business building cannot be done in unison. But in many instances, combining both can be beneficial.

Comments (1 of 1)

Great episode. The Underpants Gnomes always remind me of an opinion piece the journal ran during Obama's original campaign that compared Obama that most Obama campaign promises and policy proposals to Underpants Gnome logic. For example, he was going to reduce taxes and increase spending and the result would be a lower budget deficit. He's going to crack down on banks with more regulation and put an end to loose lending standards which would result in banks lending more money and stimulate the economy.

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